Part 5
Equity research: Murphy USA, Inc. (Part 5 of 8)

Murphy USA: A lower-cost business model gives Murphy an advantage

Murphy USA, Inc. (MUSA): Market overview

The gas station/C-store industry has enjoyed a strong performance over the past five years. According to IBISWorld, industry revenue has increased at a 0.8% CAGR (compound annual growth rate) to $466.9 billion over the period, with 2.2% growth expected in 2013. The world price of crude oil is the main driver of the industry’s revenue growth. Gasoline makes up the lion’s share of revenue, and pump prices are driven by the ebbs and flows of world oil demand. To maximize profitability, though, industry operators are increasingly relying on convenience store sales. Over the next five years, revenue is forecast to increase at a CAGR 2.0% to $514.4 billion.

Oil refiners and E&P (exploration and production) companies have divested their retail brands, given the multiple discount between pure-play E&P firms and shareholder pressure. Thus an increasingly fragmented market place—net positive for Murphy, as the company has scale over its competitors along with a platform for new stores (Walmart relationship).

Estimated Vehicle Miles Driven on All RoadsEnlarge Graph

Competition

Concentration in the Gas Stations with Convenience Stores industry is very low. Industry concentration has decreased over the past five years, as more prominent companies in the industry divested gas stations to concentrate on more profitable locations. The recession prompted many oil companies to concentrate on more profitable operations. Scale is important in the industry, as it allows for greater bargaining power for merchandise and an ability to acquire large amounts of fuel at better terms than a small operation.

MUSA Key Risks and Mitigants 2.51.09 PMEnlarge Graph

Miles driven

According to the Department of Transportation, miles driven have declined 2.8% from the last peak due to the Great Recession and higher fuel costs. In August 2012, the US Department of Transportation and the EPA finalized the corporate average fuel economy (or CAFE) for cars and light-duty trucks. The new rule requires an average fuel economy of 54.5 mpg for 2025 model year vehicles. This is a stringent increase from President Barack Obama’s 2012–2016 standard, which increases the CAFE average to 35.5 mpg by 2016, up from the current CAFE average of 29 mpg.

While total miles will may decline, MUSA should retain or grow market share on a per-store basis and can reasonably expected to grow both revenue and profit but increase embedded store base at attractive rates on capital deployed.

MUSA Comparable FirmsEnlarge Graph

Comparable firms

Merchandise margins tend to be lower for MUSA, as the company’s store size restricts the amount of convenience items the company can carry. Additionally, MUSA’s small-format stores focus on tobacco products (~89% of sales), which tend to be lower-margin, high-volume products. Going forward, MUSA’s gross margins should normalize in line with its peers as the company continues to build out its 1,200 square foot stores, which carry a wider variety of merchandise and have the high margin dispensed drink fountains.

Murphy’s peers tend to have higher merchandise margins, as they operate larger-format stores away from a leading price retailer such as Walmart, which allows for the sale of high margin prepared food products among other items. However, these large-format stores have their drawbacks, as they require greater capex buildout and higher operating costs.

The Market Realist Take

According to the company’s filings, Murphy’s collaboration with Walmart in a fuel discount program “enhances the customer value proposition as well as the competitive position of both Murphy USA and Walmart with respect to our peers.”

The company’s partnership with Walmart is beneficial, as its retail outlets are strategically located close to Walmart locations, and the fuel discount program leads to sales of cheaper fuel on a price-per-gallon basis. Besides, the company also sells low-cost convenience goods for Walmart shoppers. The partnership gives an opportunity for the company to grow organically in terms of access to new locations. In December 2012, it signed an agreement that allows it to build 200 new locations on Walmart sites over the next three years. The company has 1,179 sites as of 2Q 2013.

Apart from the Walmart partnership, the company also has the advantage of a “best buy” method, through which third-party tanker trucks are sent to a terminal. This is the most favorably priced strategy to load products for each of the company’s sites. So the company is able to lower fuel costs, adding to management’s focus on low-cost operations.

Murphy’s competitors in the convenience store space include Susser Holdings Corporation (SUSS), Casey’s General Stores (CASY), Alimentation Couche-Tard (ATD), The Pantry, Inc. (PTRY), TravelCenters of America (TA), and CST Brands, Inc. (CST)—spun off from Valero (VLO) in April.

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